Nevada senseless war on California

A recent ad campaign pitting Nevada against California to lure businesses is a waste of money and ignores the fact that firms seldom move because of tax-haven promises.

August 27, 2009|Ethan Rarick | Ethan Rarick is the director of the Robert T. Matsui Center for Politics and Public Service at UC Berkeley and the author, most recently, of "Desperate Passage: The Donner Party's Perilous Journey West."

In case you haven't heard, California and Nevada are at war. Not an old-fashioned war with bullets and tanks, but a newfangled media battle over which one is the last best hope for entrepreneurs and businesses in these troubled times.

Nevada started it. The Nevada Development Authority launched a campaign that will spend a million dollars over a year to air a series of ads enticing California businesses to move to Las Vegas. The spots boast about Nevada's low taxes and workers' comp fees and feature a chimpanzee and a really bad actress portraying a television newswoman who turns into a pig wearing bright red lipstick.

California Assemblyman Jose Solorio (D-Santa Ana), putting his campaign funds to creative use, is paying for counterattack ads that list corporate behemoths based in California and make fun of lonely, cow-filled Nevada.

California's political and financial dysfunction cannot be denied, but, as it turns out, it also doesn't work so well to base your state economy on the hopeless hopes of starry-eyed gamblers. This year, Nevada, like pathetic old California, has been battling a multibillion-dollar budget gap. In April, an official of the Nevada Mining Assn. -- a business group, mind you -- told the Associated Press that the shortfall was "a wake-up call to say that we're broke" and a signal that "we're going to have to raise taxes."

But the real significance of the spat is that it furthers a dangerous and phony economic myth -- that hordes of nomadic businesses are roaming the country, plopping down for a year or two in a tax haven and then packing up and moving on the minute a neighboring state bats an alluring low-tax eye.

The fact is the come-hither look is useless: Relatively few businesses, once they're formed, pick up and move across state lines. Over the last several years, the nonpartisan Public Policy Institute of California has done exhaustive research trying to measure precisely how many jobs California has lost because of such moves, while also measuring the offsetting number we have gained from businesses moving into the state. The conclusion? The impact is tiny. The researchers found that the average annual job loss was only .06% of California's total employment. Just to be clear, that's not 6%; it's six one-hundredths of 1%.

The institute also examined whether the few losses that did occur were more common in "footloose" industries, such as information technology. That's often been the claim because it's obviously easier to move computers than, say, an entire automotive assembly line. But again, the numbers just aren't there. "Even in footloose industries," the researchers wrote, "net job loss from relocation is very small, and in-migration largely offsets out-migration."

In other words, most businesses live and die where they are born, thriving or failing on the merit of their product, the wisdom or imprudence of their managers' decisions and the luck of the marketplace.

When that truth is ignored, often because of the kind of one-upmanship foolishness embodied in both the Nevada and California ads, states can participate in a tax-cutting competition that does them more harm than good. Taxes, after all, fund things that businesses need.

Want to improve the business climate? Invest in good schools to produce better-educated workers. Build infrastructure projects on which all businesses depend, like transportation and water systems. Put more cops on the streets and pay for proven social programs so that workers have attractive neighborhoods in which to raise their families. Low taxes are good, but they're not a panacea.

The chief executive of the Nevada Development Authority told The Times his ads already have produced almost 50 inquiries from California businesses. I suspect most of them will seize the chance to cry on a sympathetic desert shoulder, rail for a time against the maddening liberals back home, and then do absolutely nothing about actually moving. But if a handful of companies depart to the east, it won't mean much to the broader economy there or here. (Even empty Nevada has more than 300,000 businesses; half a dozen more will not a Silver State boom make.)

So if Nevadans want to waste a million dollars on these ads, let them. In fact, from California's competitive standpoint, better that Nevada wastes $10 million or $100 million. All of that is money that could otherwise be spent on the useful public services that might help it attract more total residents than Orange County, an achievement that has thus far eluded it.

All is not well in California, and no one's in favor of needless taxation or regulation. But don't let hard times convince you that there are swarms of corporations rolling back and forth across state lines like armies on the march in search of a warm pair of arms to fall into. When it comes to showing a little skin to woo businesses, the danger of pandering far outweighs that of complacency.